The Gilmo Report

June 22, 2016

June 22, 2016

The week started off with a massive futures jack on Monday morning that faded badly into the close. However, the action was not surprising given that the upcoming Brexit vote due on Thursday provides the context for huge, news-related volatility.

As I pointed out in my weekend report, a number of stocks were looking fairly weak as of Friday, and that may be more telling in terms of where we go once the volatility of the pending Brexit vote has passed. But weekend polls that allegedly showed a slight lead among UK citizens supporting a “remain” vote sent the futures rocketing higher on Monday.

Over the past three days we have seen the futures up before the open but by a lesser amount each day. So some of that initial excitement over a “remain” vote has subsided, and newer polls shows that the vote will be very close. So all this creates some interesting if not wild volatility, but the bottom line is that we will not know the final results until Friday morning here in the U.S.

Meanwhile, the daily chart of the NASDAQ Composite Index reveals a badly stalling rally attempt on Monday followed by a pause just below the 50-day line and then another weak stalling and reversal day today. The index also closed today below its 50-day line for the third day in a row despite two sharp rally attempts on two out of three of those days.

In my book, this action is weak, and the dearth of stocks in buyable set-ups currently adds additional weight to the premise that this is a weak market. What it does after the Brexit vote will likely be a short-term affair, particularly if it results in a rally response.

 

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The S&P 500 Index also suffered two big stalling reversals on Monday and Tuesday after initial futures-led upside jacks to start the day. It is, however, still holding above its 50-day moving average, but this may soon be breached. At the very least the index action and the action of individual stocks is telling one that stepping into positions into the Brexit vote, particularly on the long side, may not be worth stepping into. One might end up stepping into something quite nasty.

On the other hand, if we were to see a Brexit vote to remain in the European Union, I would tend to look at any rally response as a potentially shortable affair. So far the morning futures jacks have simply provided short-sellers with several intraday short-selling opportunities on a short-term, swing-trading basis and little more.

 

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Precious metals have sold off as the fear bid appears to have dissipated somewhat. Both the iShares Silver Trust (SLV), not shown, and the SPDR Gold Shares ETF (GLD) have pulled back so far this week. The SLV has held up just below its 10-day moving average and well above its 20-day moving average.

Meanwhile, the GLD, as we can see below, has come down a bit more into its pattern and closed today just below its 20-day moving average. It remains above its 50-day moving average by less than one percent. Thus this might be considered an opportunistic place to buy for those who believe the longer-term trend for precious metals is up. Certainly, if we see a Brexit vote to leave the EU, gold may spike to the upside.

 

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The precious metals stocks also mimic the action in the metals themselves, something I’ve discussed almost ad nauseum in recent reports. Both Silver Wheaton (SLW), not shown, and Agnico Eagle Mines (AEM) have pulled into their 20-day moving averages on below-average volume. AEM showed a strong increase in volume in what looks like supporting action at the line. If you like these stocks, then this is the spot to look at buying them given that risk can be kept to a minimum by using the 20-day lines as guides for tight downside stops.

 

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From an individual stock perspective, perhaps the biggest story was last night’s announcement by Tesla Motors (TSLA) proposing a buyout of SolarCity (SCTY) at a price of between 26-28.50 per share. On its face, the deal comes off as a little bit fishy given that TSLA CEO Elon Musk’s cousin is the CEO of SCTY.

Whether the deal makes sense for TSLA or whether it is just a shady in-the-family bailout of a floundering solar company is not really our concern. What we know objectively is that the stock was a short at or around the 200-day moving average as I discussed in my weekend report.

However, as I tweeted in the after-hours yesterday, the stock got as low at 189.20 in after-hours trade and was undercutting a major low at 195 from August 2015. I noted that members who were short the stock might consider covering at least part of their position since this put the stock in a potential “undercut & rally” position.

That’s precisely what happened as the stock pushed back above the $200 price level this morning. Had one covered on the after-hours undercut of the 195 August 2015 low, one then would have had the option of re-entering the short using a 620 intraday chart sell signal. Such a sell signal actually occurred just before mid-day at around the $200 price level. TSLA eventually finished the day at 196.66, just above the August 2015 low but below the lows of October 2015 and May of this year.

 

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One thing to keep in mind if you are campaigning TSLA on the short side is that many consider the buyout of SCTY to be so absurd that it may not be approved by TSLA shareholders. IF it isn’t, then the stock could rally hard. Therefore, as the shareholder vote approaches one must decide if a profit in hand is worth two in the bush.

Alphabet (GOOGL) was a nice short trade last Friday, but as I noted in my weekend report the stock was undercutting the prior late April/early May lows. This put it in position for a typical undercut & rally move, and that’s more or less what we have seen over the past three days. However, that undercut and rally move has not produced big gains from a percentage standpoint. The net result, despite three up days in a row, has been that the stock has merely built a short, three-day bear flag.

In this case, one might consider the stock shortable here or on any small push up into the highs of the bear flag just below 716. Keep in mind that the stock is less than 1% away from that high, so even shorting the stock here would be feasible using that or even the 20-day line at 725.24 (about 2% away) as a guide for a reasonably tight upside stop.

 

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But not all short-sale targets are necessarily going to be as cooperative as TSLA and GOOGL have been. That’s what stops are for, and I will emphasize the fact that when you set a stop you must always stick to that stop! Particularly when it comes to the short side.

So in the case of one of my less cooperative short-sale targets discussed in recent reports, Priceline Group (PCLN), the 10-day moving average was your guide for a tight upside stop if you tested a short position anywhere in here between the 10-day line and the 50-day line.
My feeling over the weekend, as I discussed, was that, “a breach of the 50-day moving average at 1301.67 would confirm the stock as a short-sale target.” However, those willing to do so and maintain a tight stop along the 10-day line could attempt to anticipate such a break by shorting the stock on blips up to the 10-day line.

Instead, PCLN has decided to go its own way by moving back up towards the highs of its current three-month price range. In this case, covering on Monday’s push above the 10-day line was the right thing to do. This would now put one in the much more comfortable position of revisiting the stock as a short here at the prior highs which could serve as resistance.

While Monday’s move was of course caused by the big general market futures jack, today’s move was caused by an “overweight” rating on the stock coming out of Barclays Bank. That sent PCLN to a marginal new high at 1374.50 early this morning. I blogged early in the day that this looked shortable to me, and by the end of the day the stock closed in the lower half of its daily trading range on above-average volume. It strikes me as shortable here using the 1374.50 high of today as a guide for a tight upside stop.

 

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As I wrote over the weekend, I consider Apple (AAPL) to be shortable on any rallies up to the 20-day moving average. Short-sellers got their chance today as the stock did exactly that on news of the impending release of yet another iPhone, the iPhone 7.

As I blogged this morning, this merely brought the stock into optimal short-sale range, and it indeed reversed right at the confluence of its 10-day and 20-day moving averages. By the close it was trading right near the lows of its intraday price range on light volume as buyers lost interest in the weak, news-generated rally. AAPL remains a short on any rallies back up into the 20-day line, now at 97.09.

 

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Netflix (NFLX) announced that they are raising their monthly prices by $2, something that I noticed in an email the other day since our household is in fact a NFLX customer. I don’t watch it much, but my offspring apparently live on it. That price increase wasn’t welcome by the market, however, as NFLX briefly rallied up into the confluence of the 20-day and 50-day moving averages early in the day on weak volume. That put it in an optimal short-sale position and the stock then reversed to the downside as buying interest faded.

One thing to notice about NFLX is that the price drop over the past three days has been relatively continuous. In other words, one could short it each day, cover by the close, and then re-enter on the short side the next day. Because I consider NFLX a stock that could be subject to buyout rumors or news, I would prefer to campaign it this way. This allows me to avoid holding a position overnight when news might hit, while the stock cooperates by allowing me to easily re-enter my short position the next day.

NFLX is now extended to the downside and out of shortable range. It would take a rally back up to the 20-day line at 94.96 to make it shortable again. This has been a good example over the past three days of how a stock can be worked on the short side as long as it trades in continuous fashion.

 

GR062216-NFLX

 

We’re seeing more of these cloud names start to look more like short-sale targets again. Hopefully, those members who are keen on the short side of the market were able to recognize a very actionable short-sale set-up this morning in Adobe Systems (ADBE), one of the cloud names we’ve been following in recent reports.

ADBE came out with earnings yesterday after the close, and while they did beat the estimates, that wasn’t good enough for the market. The stock gapped down this morning just below the 50-day line, opening up at 95.53. It then rallied back up towards the 50-day line at 96.64, getting within 14 cents of the line.

At this point, an alert short-seller would realize that a) the stock was a shortable gap-down type of move, and b) the intraday push back up towards the 50-day line put it in an optimal short-selling range without having to wait for the stock to post a firm intraday high. In this manner, using the 50-day line as your guide for a tight upside stop instead of the intraday high, as we might otherwise use on a shortable gap-down set-up, was far more efficient. It also allowed one to take action early.

 

GR062216-ADBE

 

Other clouds names are also starting to wobble at areas of support, such as

Workday (WDAY) has been holding above its 20-day moving average over the past couple of weeks. However, today it closed below the line on light volume. Whether this presents a buyable pullback or the start of an outright failure back down through the 20-day line is still unclear. What we can see is that the stock has started to fail on its early June trendline breakout attempt, which is not constructive.

Therefore, this needs to be watched as a potential short-sale target as it begins to wobble along the 20-day line as much as it would be considered to be in a lower-risk buy position. I think one should also keep a close eye on the group in general as the cloud wolf pack does tend to travel together.

 

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For example, Salesforce.com (CRM) is most definitely showing cracks in its pattern. Over the past four days it has been pushed below the 20-day moving average on above-average selling twice. This comes on top of another heavy-volume selling day that closed right at the 20-day line. Overall we can see that buying volume has come in far below selling volume so far in June. For this reason, I tend to view CRM as a short on rallies up into the 10-day or 20-day moving averages at 81.47 and 81.32, respectively.

 

GR062216-CRM

 

ServiceNow (NOW) is looking similar to WDAY in the sense that it, too, is wobbling at key levels of support, in this case right along its 200-day and 20-day moving averages. NOW closed below the 200-day line for the second time over the past four trading days, but selling volume was very light. Without any decisive volume one way or the other, NOW sits at a critical juncture in its pattern. However, we should note that the stock has already failed on a base breakout attempt from early June. That serves as one strike against the stock.

Also, over the past two weeks, selling volume has come in higher, particularly four days ago when the stock reversed at the 10-day moving average. This might be considered shortable on rallies back up into the 20-day line, currently at 72.71.

 

GR062216-NOW

 

Other cloud names like Splunk (SPLK), not shown here on a chart, are in less compromising positions. SPLK has been able to hold above its 10-day moving average. But as I theorized over the weekend, one might still be on the alert for a failure back down through the 20-day moving average on heavy selling volume.

Another cloud name, Citrix Systems (CTXS), also not shown here on a chart, is looking weak as it wobbles along its 20-day moving average at the 85 price level. The stock has already cleanly violated its 20-day moving average last week, so I tend to see it as shortable here using the 10-day line at 85.28 or today’s intraday high at 85.87 as a guide for a tight upside stop.

As a potential big-stock barometer for the cloud wolf pack, Amazon.com (AMZN) may provide some confirmation of any impending weakness. Last week the stock broke below its 200-day moving average on heavy selling volume, an initial negative.

Today we saw AMZN close just slightly below the 20-day moving average on a small increase in selling volume which still came in very light. I would have to say that the stock is showing some signs of wobbling here. One would have to be somewhat bold to short it here with the idea of using the 20-day moving average as a guide for a tight upside stop.

However, I do tend to think that if we see AMZN split wide open, the rest of the cloud wolf pack will be dropping right along with it. I know that most analysts consider AMZN to be a retail stock, but persistent weakness in retail names hasn’t been seen in AMZN. It has, however, rallied with these Ugly Duckling cloud names we’ve been watching. In my view this argues for its consideration as a cloud name instead of just a retail name.

 

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Facebook (FB) is currently stuck within a seven-day bear flag after busting below its 20-day and 50-day moving averages on cascading selling volume last week. This action brought the stock into play near the 20-day line last week as a late-stage failed-base (LSFB) short-sale set-up.

Over the past two days the stock has tried to rally up to the highs of this short bear flag but is now running into resistance along the rapidly descending 10-day moving average. Buyers just don’t seem to be all that interested in the stock here as the stock has stalled and closed in the lower parts of its daily trading ranges over the past three days.

Optimally, I would consider FB to be quite shortable on any rallies into the 20-day line at 115.77 or the 50-day line at 115.98, but it may not have enough life in it to do so. Thus the 10-day line can serve as a potential reference point for shortable rallies, and that would have worked over the past two days.

 

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Among stocks on my short-sale watch list that are in much more optimal short-sale zones, Alibaba (BABA) is still holding up just above its 50-day moving average. However, note that the stock has closed up each day so far this week on volume that has been light and declining each day.

Therefore, I would consider this to be something of a wedging rally back above the 50-day line, which of course puts the stock in an optimal short-sale range. In this manner I think the stock can probably be shorted here using the high of today at 79.12 or the prior breakout point just above the 80 level as a guide for a tight upside stop.

 

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I was glad to see that one member was on the ball today and pegged cruise-line operator Carnival Corp. (CCL) as a short-sale today as it rallied just above its 50-day moving average. Using the 620 intraday chart to guide a potential short-sale entry, one would have observed a sell signal occur at just before 9:00 a.m. my time here on the West Coast.

That signal occurred right around the 49.10 price level, and the stock then closed at 48.86 on above-average volume. This represented a reversal at the 50-day moving average on higher volume. The stock remains in shortable range using the 50-day line at 49.07 as a guide for a very tight upside stop.

 

GR062216-CCL

 

If you study the weekly chart of CCL, you can see that it is basically a Punchbowl of Death or POD short-sale set-up. After the February lows, the stock formed the right side of an extremely v-shaped cup formation with five weeks down the left side and eight weeks up the right side. That sort of straight down and then straight up POD formation is generally not going to produce a sustainable rally. We can certainly see that the stock failed several weeks ago when it busted below its 10-week moving average.

This latest rally has merely brought it up into a declining tops trendline and the 40-week moving average. In this position it is therefore vulnerable to a reversal back to the downside, as I see it.

 

GR062216-CCL Weekly

 

My notes on other short-sale target stocks I’ve discussed in recent reports:

Acuity Brands (AYI) morphed into a short-sale target last week when it busted its 50-day moving average. Over the weekend I indicated that rallies up into the 50-day moving average would offer the most optimal short-sale entry points. The stock did exactly that this morning, rallying just above the 50-day line at 251.85 before reversing on increased selling volume and closing below the line. The stock ended the day within 1% of the 50-day line which keeps it within short-sale range using the line as a guide for a tight upside stop.

Broadcom Ltd. (AVGO) was shortable on Monday as it rallied up into the 10-day line per my discussion of the stock over the weekend. It has since continued to trade lower, closing today back below its 20-day moving average. This is another late-stage failed-base short-sale set-up, and I would certainly view this as shortable anywhere between the 20-day line at 156.48 and the 10-day line at 158.49 should we see any bounces in the stock near-term.

Checkpoint Software (CHKP) was shortable last week per my blog post back when it was trading along its 20-day moving average last Wednesday. CHKP then gapped below the 200-day moving average which now serves as upside resistance as it works its way within a short four-day bear flag. Therefore, the stock is shortable on rallies up into the 200-day line at 82.21 using that as a guide for an upside stop.

Over the past few days I’ve been looking at Ugly Duckling type set-ups among names like Three D Systems (DDD), Stratasys (SSYS), Twitter (TWTR), FireEye (FEYE), Fortinet (FTNT), F5 Networks (FFIV), and Finisar (FNSR). You might notice that two are 3-D printing names, two are networkers, two are cyber-security names, and one is a social-networking names.

The only problem with all of these is that I don’t currently see lower-risk entry points for any of them. These are names I will keep on my long watch list, but right now it’s not looking like I want to be emphasizing the long side. While any of these names might be buyable on low-volume pullbacks to areas of potential support (I’ll leave it up to you to study their daily charts), the only one in perhaps a more constructive position is Finisar (FNSR).

The stock posted a buyable gap-up (BGU) on Friday after announcing earnings Thursday after the close. Since then it hasn’t really gone anywhere and is now testing the 18.25 intraday low of Friday’s BGU. FNSR closed today at 18.30. Therefore, the stock is in a very low-risk buy position if one uses the 18.25 price level as a guide for a tight stop. However, it is questionable whether the general market will cooperate. It is perhaps something to keep on your watch list.

 

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F5 Networks (FFIV) is another networker in what appears to be normal consolidation following a big pocket pivot move early in June. That bottom-fishing type of pocket pivot came on news that the company had hired an investment bank to help it evaluate takeover offers. I suppose that means FFIV is in play, but I would simply watch the price/volume action here as it tracks tight sideways along its 10-day moving average. Volume has been drying up sharply in the process, with today’s volume levels coming in at -61% below average.

This could test the 20-day moving average at 115.69, but it is one to keep on your long watch list as something to look at IF the general market somehow finds its feet and begins to rally again. Currently, however, I am not all that confident that this will come to pass, but we should maintain an open mind as we evaluate the current market situation.

 

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Below are my current trading journal notes regarding other long ideas discussed in recent reports:

Activision (ATVI) is holding along the 20-day moving average but is starting to look like it might break below the line to test the 50-day line at 37.06.

Ambarella (AMBA) is probably best looked at on the long side on a constructive retest of the 50 price level and/or the 200-day line at 48.87. However, expecting that AMBA will suddenly launch on another move like it had in early June is perhaps expecting too much, and the stock at least needs some time to consolidate those heady gains.

Electronic Arts (EA) is, like fellow video-gamer ATVI, holding along its 20-day moving average. A test of the 50-day line at 70.90 in a weakening general market would not surprise me, and could present a highly opportunistic entry point, emphasis on “could.”

Fabrinet (FN) is back down to the 20-day line on increased selling volume. Looks to me like a test of the 50-day line at 34.43 may be in the cards.

Maxlinear (MXL) is looking like it wants to test the 50-day moving average at 18.67. I’ll check in with the stock when it gets there as it seems quite sluggish currently.

Silicon Motion (SIMO) is holding tight along its 10-day moving average and showed a little bit of supporting action along the line today. But I would still prefer to see a pullback to the 20-day line at 44.59 if I’m truly interested in buying this.

Weibo (WB) has been bouncing off of its 20-day moving average but ran into some heavy selling volume today as it managed to close just above the line. This looks to me like it may want to test the 50-day moving average at 24.69, which more or less coincides with the prior breakout point of late May.

Yirendai Ltd. (YRD) is probably going to test its 50-day moving average at 12.76. This might create an undercut of last week’s low at 12.90, so that might be something to watch for as a highly opportunistic (if not gutsy) entry point.

Zendesk (ZEN) is holding along its 10-day line and showed some supporting action along the line today. However, I would consider a pullback to the 20-day line at 26.45 as a more optimal entry point.

This remains a tough market to get a handle on ahead of tomorrow’s Brexit vote. As I see it, anything could happen. If the UK votes to leave the EU, we could see the market come apart, or we could see a relief rally. If the vote results in a “remain” decision, then we could see the market rally sharply in response, or simply turn into a sell-the-news type of situation.

Ultimately, it boils down to what we’re seeing in terms of individual sock set-ups and price/volume action. For now, that appears to be leaning toward the negative side. Therefore, I remain most interested in potential short-sale set-ups, but will keep a close eye on my long watch list, along with an open mind as things play out come Friday morning.

At the very least, Friday is likely to be a very interesting trading day.

Gil Morales

CEO and Principal, Gil Morales & Company, LLC
Managing Director and Principal, MoKa Investors, LLC
Managing Director and Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held positions in ADBE, BABA, CCL, and FB, though positions are subject to change at any time and without notice.

Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.